Sovereign Debt Crisis or Oil in the Euro Area Recession of 2011-13

Conventional wisdom (sovereign debt crisis and austerity measures) or oil as cause? Steven Kopits says oil:

The cause of a brutal recession in Europe during Q4 2011 – Q1 2013 remains unexplained in policy circles. Or more precisely, the proposed explanation is less than compelling. …  oil prices once again returned to high levels, with Brent regularly in the $100 – 115 range. With this, oil consumption in both the US and Europe began to decline, and such declines in oil consumption due to high prices — normally characterized as an oil shock — invariably leads to recession. … to suggest a Greek financial crisis could cause a recession in Europe is not entirely convincing. Greece’s GDP is all of 2% of that of the EU. It would be like a financial crisis in Indiana taking down the US economy. Conceivable, but it does not jump out at you.

Here’s a picture of Euro area real GDP against nominal oil prices (Brent):

Figure 1: Euro Area 19 GDP in mn Ch.2010EUR (blue, left log scale), price of oil (Brent), $/bbl (brown, right log scale). CEPR defined peak-to-trough recession dates shaded gray. Source: EuroStat via FRED, EIA, CEPR.

And here’s a picture of sovereign spreads for Spain and Italy (of the GIIPS). Notice, I’m not including Greek spreads.

Figure 2: Euro Area 19 GDP in mn Ch.2010EUR (blue, left log scale), Spain-Germany 10 year sovereign bond yield spread (red, right scale), Italy-Germany spread (green, right scale), both in %. CEPR defined peak-to-trough recession dates shaded gray. Source: EuroStat via FRED, OECD via FRED, CEPR.

In other words, with concerns about debt unsustainability, austerity was forced onto GIIPS, resulting in higher default risk premia, that then made debt sustainability even less plausible. In the end, austerity proved contractionary (there was no expansionary fiscal contraction). Only when the ECB intervened to cap yields did growth resume. Oil does not figure in as a primary factor in any interpretation I’m aware of (save Mr. Koptis’s). In other words, I would say the cause of the 2011-13 Euro area recession is not unexplained in policy circles.

More discussion here.